After the IPO in April 2018, shares of the subscription services provider Zuora (NYSE: ZUO) has been volatile touching a 52-week low of $15.56 in December last week. However, the stock has recovered 27% this year paring the losses of last year and is currently trading at $23 range, an increase of about 17% over its IPO price of $20.
The software-as-a-service (SaaS) provider is slated to publish its fourth quarter results on March 21 after the bell. Since IPO, Zuora has been reporting solid headline numbers surpassing analyst estimates. Investors would be hoping the trend to continue into the Q4 period as well.
However, the volatility in the stock price could be attributed to the fact that the cloud-based provider is yet to report profits. As the company is investing in improving the product offerings and marketing efforts, one can expect the trend to continue into the next fiscal as well. Still, any insight from management on becoming a profitable firm would be of interest to shareholders.
For the Q4 period, analysts are expecting a loss of $0.11 per share and sales to touch $62.87 million. Last quarter, Zuora reported adjusted loss per share of $0.10 and sales of $61.6 million. On the Q4 outlook, the company expects revenue to be between $62.3 million to $63.3 million and adjusted loss per share of $0.12 to $0.11. Based on the track record since the IPO, the company is expected to top analyst estimates for the Q4 period.
What to watch?
Zuora’s gets more than 70% of its revenues through subscription offerings. In the last three quarters, subscription revenue has grown 39%, 44%, and 43% respectively. For the Q4 period, the company expects subscription revenue to be between $45 million to $45.5 million. Based on the past three quarters growth rate, one can expect the growth rate to be in the 40% range for the Q4 period.
There are two key metrics to watch to gauge the performance of the company. One is the annual contract value (ACV) over $100,000 and the dollar-based retention rate. On the ACV front, the company has seen a steady increase in high-value customers as more firms are transforming towards subscription-based offerings responding to business model changes.
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Last quarter, the company had 504 clients with a growth rate of 30%. Investors would expect Zuora to maintain the same growth rate when it comes to Q4 period as more firms across industries opt for subscription-based services.
Second metrics tracked by the street is dollar-based retention rate. This metric would give an idea about whether the company is able to retain customers on a year-over-year basis. For the past three quarters, it came in at 112%, 112%, and 115%. The SaaS provider has been reporting the retention rate above 100% which clearly shows that apart from retaining customers it can upsell more products to its existing clients, resulting in better margins.
In addition, if a firm is using multiple product offerings from Zuora, moving to another provider for the customers would be a lengthy and costly affair. This would help the subscription services provider to retain its clients, which would improve the profits in the near future.
Expanding Footprint
The company which counts clients such as Toyota, Kia Motors, GM, Ford, and Wall Street Journal has been broadening its presence across industries. Apart from software and services domain, currently it has started offering its services to companies in the media and publishing space. In the auto industry, the company already counts six of the top 10 OEMs as clients.
Zuora has been focused on identifying industries which are in early stages to adopt subscription-based services. This would help the company to expand its addressable market helping it to diversify its customer base and improve the margins in the next fiscal.